Senate Study on Digital Currency
Remarks by Manie Eagar
Co-founder and Chairman of the Digital Finance Institute
Director, Bitcoin Alliance of Canada
For Canadian Standing Senate Committee on Banking, Trade and Commerce
December 10, 2014
Update: Light Touch Regulation following from presentations
In June 2015 the Senate released its report, entitled “Digital Currency: You Can’t Flip This Coin”, available here, makes eight recommendations, including that Canada dialogue internationally with a view to maintaining a “light touch” global regulation for digital currencies, hinting that Canadian-made light touch laws on digital currencies could prevail internationally.
My name is Manie Eagar. I am a co-founder and Chairman of the Digital Finance Institute. I have been in consulting, a business executive, a software developer and an entrepreneur in the financial services, investment management, telecommunications and development banking arena for the past three decades, originally based in South Africa, but the last few years here in Canada.
Thank you for the opportunity to attend your hearing today and to provide input to the Committee on digital currencies.
My comments will focus on the latest trends in the digital finance space and the three drivers spurring future development and adoption namely innovation, transparency and inclusion.
I have published a series of articles over the last few months covering these issues in great detail and further background and references can be provided on request.
- DIGITAL FINANCE INSTITUTE
The DFI aims to become a globally recognized center of excellence in digital finance policy and regulation and to include ways to address financial inclusion with digital finance, actively linking and supporting industry, government, policy makers, financial regulators and academia through thought leadership and dialogue.
The DFI believes that this will be achieved through:
- Innovation: Support globally is growing for digital finance ecosystem startups, entrepreneurs, and investor communities that are integrating distributed digital banking, mobile transactions and cryptocurrency solutions and delivery platforms; and participation in the emerging digital economy market areas, such as social and environmentally motivated initiatives, diaspora remittances and other sectors.
- Transparency: Transparent processes lead to trust and increase the bandwidth of value exchange. As with the digital marketplaces that constitute the share economy, success hinges not on simply providing a service but on the quality of the experience. And, most importantly, is it affordable, secure and accessible? There needs to be broader involvement and greater development of international collaborations and initiatives for standardized and balanced regulation over digital payments and remittances, and emerging technology issues; and the monitoring of regulatory performance and reform for effective consumer and investor protection in digital finance.
- Inclusion: Financial inclusion is a key driver of a future sustainable global society with fair and equitable access to resources, wealth, value exchange and affordable and relevant financial services. The availability of banking and payment services to the entire population without discrimination should be the prime objective of any financial inclusion public policy.
The development of innovative solutions is required to solve the problems of financial inclusion; to support sustainable economic growth; and to advocate for greater participation of women and excluded communities in financial technology and the digital economy.
For example, the vast majority of users in the so-called unbanked and underserved markets are women who manage their household income, are usually street vendors and attend their open markets. We regard them as a key target market for financial inclusion and digital finance literacy programs.
With regards the last point it is useful to refer to the success of M-PESA in Kenya that shows the potential for new financial technologies to reach large markets and mass audiences across jurisdictions. M-PESA in short, converts mobile phone airtime ‘tokens’ designated in the local currency for value inter-exchange. Today a quarter of the 44 billion dollar economy in Kenya runs through M-PESA. 79,000 people who might have been otherwise jobless have been given opportunities to work as M-PESA agents.
It is not coincidental that Canada’s own Rogers mobile services provider has acquired a banking licence and recently opened its Rogers Bank online offering credit card access, a rewards scheme and other benefits for a start.
Cryptocurrency innovations initiated by the bitcoin protocol and later iterations have further opened up a range of applications and potential solutions for an increasingly globalized economy that invites further exploration. Emerging digital finance models and technologies for financial inclusion can positively impact those who are ‘unbanked’ or excluded, and create greater access, equality and efficiencies in established markets.
- A FUTURE SCENARIO FOR DIGITAL CURRENCIES/FINANCE
Therefore, digital finance innovation is driving new regulatory models to support participation and inclusion. A range of stakeholders and interest groups, the digital finance industry, merchants and consumers alike are co-responsible to ensure enabling environments are created to ensure the evolution, inclusion, benefits of, and their participation in the latest digital finance offerings.
Today digital finance is a new and emerging area of finance that encompasses the areas of financial technology, digital payment systems, and digital financial products such as digital derivatives, digital securities, digital carbon credits, and a wide variety of digital forms of traditional financial products.
We are experiencing a convergence (some say a collision) between three key areas of the digital finance evolution: digital (or branchless) banking, mobile commerce and cryptocurrency platforms (the so called blockchain).
I attended the Money 2020 conference in Vegas a few weeks ago and was struck to the degree that this overlapping and hybridization of platforms is already taking place. Breakthrough innovation was clearly apparent, from the forthcoming Apple Pay tokenized offering through wearable watches and NFC (Near Field Contact) to the ‘gyft’ loyalty card offering, already running on the bitcoin blockchain, reaching major retailers across North America,
Every banker and fintech industry expert was talking about ‘this bitcoin thing’ and speculating about how his or her businesses could benefit from the emerging crytptocurrency technologies and apply it to their next generation offering.
Mr. Ben Lawsky, the New York State’s first Superintendent of Financial Services, in his opening address, felt that they needed to revisit their definitions of bitcoin and cryptocurrencies in general from a regulatory perspective and go back to the drawing board to consider a ‘bitlicence light’ as he called it, to promote investments and innovation in this sector and to avoid cross-jurisdictional and regulatory confusion.
Hybrid digital finance (and regulation)
The convergence of fintech implies a ‘hybridization’ of technologies and meshing of centralized, decentralized and centralized platforms and delivery channels.
According to Gareth Murphy, director of markets for the Central Bank of Ireland speaking at the recent BitFin 2014 ‘Digital Money and the Future of Finance’ Conference in Dublin: “There are a number of reasons why this dual economy is likely to emerge, including the ease with which bitcoin can unite global consumers and merchants, the low cost of bitcoin payments, the openness of consumers to new innovations and the growing influence of technology companies”.
He envisions a hybrid Bitcoin-Fiat future where “The existence of a ‘euro-denominated economy’ and a ‘virtual currency economy’ raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).”
He continues: “Multi-currency economies are not unusual. For example, the US dollar is accepted in many economies alongside the local legal tender. Also, there are a number of regional currencies in existence in parts of France and Switzerland that aim to encourage transactions in local goods and services. But unlike these examples, rapid advances in information and mobile technology suggest that such a virtual currency could evolve. The factors behind this might include:
- the ease with which transactions can occur between counter-parties located anywhere in the world;
- the relatively low cost of effecting payment and transmitting funds;
- the fact that many large technology companies are household names that are recognisable and trusted; and
- the possibility of engaging a large market with a broad demographic span, particularly in terms of age and sex, which is open to new innovations”
Mr. Gareth Murphy summed up the future challenges for service providers and regulators from a Eurocentric perspective as follows:
- who is transacting (to address AML concerns)?
- how safe is the payments infrastructure?
- how much economic activity is denominated in virtual currencies?
- to what extent is the ‘virtual currency economy’ connected with the ‘euro-denominated economy’?
- how do we distinguish between transactional activity and speculative/investment activity?
And from a monetary policy perspective, there is also the fundamental question of understanding the supply of the virtual currency and its impact as a form of money.”
In short, there is a lot of work ahead for many players at many levels to address and deliver the promise of digital finance 2.0.
- THE OPPORTUNITY FOR CANADA
Our purpose is to develop a deeper understanding of the evolving area of digital finance and to provide leadership in digital finance in the commercial, public, and social sectors that will guide policy, investment decisions and support financial technology (fintech) innovation and job creation in Canada in this area.
- The digitalization of the economy is growing at a phenomenal rate, impacting and challenging the way we conduct financial transactions. In 2012, a total of 22.2 million megabits of data crossed the global economy involving $4 trillion in digital financial transactions among 194 million people. (Sources: World Bank, IMF, Thomson Innovation, McKinsey Global Institute.) If the spread of digital technology in finance and rising prosperity continues, the global flows will triple by 2025, boosting economic growth. (McKinsey Global Institute Report, 2014.)
- Digitization of the financial sector is transformative because it reduces costs of services and distribution and creates purely digital financial products and services, some of which are entirely new, and others of which may not be new but are delivered on international digital platforms that are new. These technological changes create significant opportunities for new financial technology for Canada, and many new opportunities for governments and companies to drive growth and innovation, opening the door to greater participation by entrepreneurs.
- These changes put pressure on governments to consider how their economies should participate and how they can and should enable participation through the right business environment and regulation, and ways in which they can capitalize on the global shift to digital finance. There will need to be new investments and focused policies to embrace the increasing digitization of finance and the consideration of a wide-range of untested issues.
- Currently, there are no global regulatory regimes or regulatory infrastructures that address digital finance, including how machine-to-machine digital financial transactions will be regulated in the ‘Internet of Things’ world. Canada has an opportunity to step in and take a leadership role in this area.
We appreciate your consideration of the issues identified today in the course of the Committee’s review of digital currency, and we would be pleased to answer any questions.
About the DFI: The Digital Finance Institute is a not-for-profit organization based in Vancouver, BC, Canada.
Manie Eagar, Co-founder and Chairman, has invested the last two years in deal shaping and making in the new world of digital value inter-exchange, mobile media delivery platforms and digital finance 2.0, inspired by the cryptocurrency protocol phenomenon. He has supported a number of bitcoin startups, growth acceleration, mergers and acquisitions, VC tie-ups and alignment with regulatory compliance. He is a director of the Bitcoin Alliance of Canada, and a member of the Global Bitcoin Alliance and Bitcoin Foundation respectively.
Manie is a global investment, mergers and acquisitions executive with over 30 years of international experience and deep skills in the startup, investment management and VC space. With Christine Duhaime he founded the DFI to make a vital contribution to the digital finance community in Canada and globally at every level of its development and deployment and finally integration with the financial and retail ecosystems. Manie has worked extensively in emerging markets and understands the needs of the financially underserved and excluded, and the so-called ‘underbanked’.
Christine Duhaime, Co-founder and Executive Director, is a financial regulatory lawyer based in Toronto and Vancouver at the firm of Duhaime Law and also consults with MNP LLP on financial crime and regulatory compliance matters. She advises casinos, banks, MSBs, credit unions, online gaming platforms, regulatory agencies, law firms and businesses on a wide range of matters and specifically on anti-money laundering law, counter-terrorist financing, anti-bribery, privacy, gambling, securities law, crowdfunding, startup issues, venture financing and international trade. She also advises digital finance companies. Her key focus is to advance the interests of digital finance globally, including supporting women in fintech, addressing financial inclusion, and addressing regulatory gaps in digital financial products and services.
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